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Commentary: Did Magellan Manipulate The Market?

December 24, 1995

News: Analysis & Commentary: COMMENTARY

COMMENTARY: DID MAGELLAN MANIPULATE THE MARKET?

Since taking the reins at Fidelity's Magellan Fund three years ago, Jeffrey N. Vinik has presided over one of the mutual-fund industry's most remarkable success stories. With hundreds of millions of dollars pouring in from investors every week, Magellan's assets have soared from $21 billion to $54 billion. And despite Magellan's unwieldy size, Vinik has maintained its longtime status as a top performer.

After such a wild ride, it comes as no surprise that rival investors are beginning to wonder: Does Vinik always play fair? In recent weeks, it has been alleged in The Washington Post that the 36-year-old investment whiz had talked up a tech stock while quietly selling it. A rival money management firm also suspects Vinik of pushing up the prices of key stocks in the last three days of every month to boost his fund's return. Sources say that the Securities & Exchange Commission is reviewing data related to the suspicions.

TILTED PLAYING FIELD? Fidelity Investments denies the charges, and many market pros seriously doubt that the SEC will find anything amiss. But regulators shouldn't take the matter lightly. The allegations speak directly to the growing concern of numerous market watchers: that Fidelity's unprecedented power gives it an unfair advantage, making it impossible for smaller investors to compete on a level playing field.

The Magellan Fund has enormous market clout--ajd so do a growing number of other multibillion-dollar megafunds. One possible response: Regulators could require more frequent reporting of holdings by big funds. That would help reassure investors that the biggest players aren't abusing their power. Another idea: Have the SEC routinely monitor the trading of large funds that now make big moves in hundreds of stocks.

Fidelity's holdings show how high the stakes have become. With $367 billion in assets under management, Fidelity holds, at one time or another, nearly every publicly traded stock. As of Sept. 30, Fidelity owned 5% or more of 863 outfits and 10% or more of 330 more companies, according to researcher Technimetrics.

Fidelity has never been caught manipulating stocks--and it's doubtful that it will be now. The most serious charge is that Vinik publicly promoted Micron Technology Inc.--at the same as he was selling Micron shares: In Magellan's October annual report, Vinik said Micron was "still relatively cheap," even though he sold about 10% of his Micron holdings that month. On Nov. 6, he told U.S. News & World Report, for a December article, that Micron's "valuations are still reasonable." But sometime in November, he dumped most of his Micron stake.

"GARBAGE" STUDY. "If he said one thing and did another, it says an awful lot about the integrity of a fund manager," says Don Phillips, president of Morningstar Inc. in Chicago. But fund managers have sprung to Vinik's defense, saying their opinions on stocks can change by the minute. And James Pollock, a securities lawyer at Sherburne, Powers & Needham in Boston, says Vinik almost certainly did nothing illegal.

The other charge comes from a study by William A. Fleckenstein, a principal at Olympic Capital Management Inc. in Seattle. It shows that Magellan's largest gains in net asset value in the past four months came almost entirely in the last three days of each month. Fleckenstein suspects Vinik intentionally flooded the market with buy orders at month's end to push up the value of his most important holdings. Kenneth Heebner, manager of CGM Capital fund and one of the industry's top managers, says the study is "garbage." "You can push a stock out of line, but the market's going to push it back down," he says.

That may be. But Magellan has to consider its position as the most visible investment fund in the world. Such prominence gives Vinik a duty to be above suspicion. Investors' fears about Fidelity are real, and it's time the SEC finds out if they are justified.By Geoffrey Smith